CAPITAL INVESTMENT
POLICY
Owner
Version 2
Version 1
Robert Woolley, Director of Corporate Development
18 July 2008
Submitted to Capital Prioritisation Group 16 July to note.
Submitted to Trust Executive Group 23 July 2008 to support.
Submitted to Trust Board for approval 29 July 2008
24 June 2008 Draft considered at Trust Board 1 July 2008
1. PURPOSE
This policy sets out the governance arrangements for capital investments
undertaken by the University Hospitals Bristol Foundation Trust.
The policy takes into account the best practice guidance issued by Monitor,
particularly that contained in Risk Evaluation for Investment Decisions by NHS
Foundation Trusts (Monitor, February 2006).
This policy will be subject to annual review by the Board of Directors. It should be
read in conjunction with the standing orders and standing financial instructions of the
Trust.
2. SCOPE
The policy applies to capital investments by the University Hospitals Bristol
Foundation Trust. It does not apply to investment of in-year surplus operating cash,
pension funds, funds of associated charities or funds managed on behalf of other
organisations.
Particular consideration is given to capital investments classed as major or highrisk.
The Trust’s definition of a major investment is given in section 4. The Trust follows
the Monitor definition of high risk investments as below:
Reportable transactions: all investments that are reportable to Monitor
under the thresholds for reporting investments in the Compliance Framework.
The applicable thresholds are shown at Annex 1.
Other transactions: all investments that have any one or more of the
following characteristics:
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an equity component, which is defined as any participation involving
shares and securities, debt instruments convertible into equity, options
conferring the right to acquire equity in the future, royalties, participation in
the profits of the enterprise, and all types of mezzanine finance where the
returns exceed normal secured debt returns;
significant reputation risk;
the potential to destabilise the core business; or
the creation of material contingent liabilities.
Monitor also provides the following examples of the types of transactions that may
be considered high risk: significant capital expenditure, acquisitions, joint ventures,
equity stakes, major property transactions, mergers and alliances (eg formal or
informal agreements to work with other institutions), irrespective of how they are
financed.
These definitions will be applied to risk assessment of capital investment proposals
in the Trust.
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3. INVESTMENT PHILOSOPHY AND OBJECTIVES
The Trust will invest in opportunities that are consistent with its purpose, mission
and aims.
The statutory and principal purpose of the Trust is the provision of goods and
services for the health service in England.
In fulfilling its core purpose, the Trust’s mission is to provide patient care, education
and research of the highest quality.
When appropriate, the Trust will make investments in line with the following key
strategic aims, set out in the Integrated Business Plan:
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to be the major specialist service provider for the population of Bristol and the
South West region;
to provide additional services for the local population;
to develop the Trust's research portfolio in line with its service strategy;
to develop research activities in partnership with academic and healthcare
organisations;
to pursue teaching and learning partnerships with education providers and
others;
to achieve a sustainable financial surplus;
to improve the environment for patients and staff, to improve ease of access for
patients and visitors and to develop the Trust’s estate to give the optimal
configuration of services.
The investment philosophy conditions the criteria which will be used by the Trust to
evaluate potential major or high-risk capital investments (defined in section 7).
The Trust will take into account the financial and non-financial risk and return when
evaluating potential investments.
The Trust will not enter into any project that would result in a breach of the
terms of its authorisation as an NHS Foundation Trust.
4. CAPITAL BUDGET-SETTING
4.1 ANNUAL CAPITAL INVESTMENT PROGRAMME
The Board of Directors will approve both the size of the annual capital investment
programme, taking account of the approved long term financial plan, and the budget
allocation between classes of investment in the programme, which will include at a
minimum:
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Strategic projects
Operational capital
Medical equipment
Other equipment
Information technology
Vehicles
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Residences and accommodation
Land.
A capital planning process will be integrated into the annual business planning
round, which will determine the approval route for each class of investment.
The Trust will move towards establishing rolling replacement programmes for key
asset classes.
Guidance will be made available about the process to be followed for each class of
capital investment. The guidance will also make specific reference to the process for
rapid preparation and approval of spend-to-save schemes.
4.2 IDENTIFICATION OF MAJOR OR HIGH RISK INVESTMENTS
All capital investment proposals will be subject to a risk assessment to determine if
they fall into the category of major or high-risk investment.
A proposal will be classed as a major investment if its estimated capital cost exceeds
1% of Trust turnover.
A proposal will be classed as high-risk if it reflects any of the characteristics identified
in Section 2.
[A template for preliminary risk assessment will be attached to the final version of
this policy.]
4.3 BUSINESS CASE REQUIREMENTS
All proposals will be supported by Business Case documentation as shown in Table
1.
Projected scheme cost as
% of Trust turnover
Documentation required
Up to 0.25%
Short-form business case
Between 0.25% and 2%
Comprehensive business case
Outline business case and (subject to OBC approval) full business
case (following NHS Capital Investment Manual guidelines).
Table 1. Thresholds for business case production.
More than 2%
Any project requiring financial support for production of the appropriate business
case prior to scheme approval must have an approved Project Initiation
Document.
[The source of templates and guidance for each form of business case will be
identified in an annex to the final version of this policy.]
4.4 PROJECT SPONSOR
Each proposed capital investment will be supported by an Executive Director, who
will be the Project Sponsor.
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The Project Sponsor is responsible for ensuring that the terms of the Capital
Investment Policy and other Trust policies are respected and that business cases
follow the appropriate decision route (see section 6).
5. FINANCE COMMITTEE
The Finance Committee will take the role of capital investment committee for the
purposes of this policy.
It will have delegated authority from the Trust Board for:
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approving the investment and borrowing strategy and associated policies;
setting performance benchmarks and monitoring investment performance;
reviewing and revising the Capital Investment Policy on an annual basis for
Board approval;
obtaining assurance that there is compliance throughout the Trust with the
Capital Investment Policy;
approving capital investments above the de minimis amount defined below,
including ensuring that the Trust has the legal power to enter into a particular
investment;
approving Project Initiation Documents for all schemes above the de minimis
amount defined below.
6. DECISION RIGHTS
6.1 BOARD OF DIRECTORS
The Board will provide oversight of the Finance Committee. It will have the final
decision over all major (i.e. greater than 1% of Trust turnover) and high risk
investments as defined in this policy.
The Board will approve the Capital Investment Policy on an annual basis.
6.2 FINANCE COMMITTEE
The Finance Committee will have delegated authority to approve business cases
with a value between 0.25% and 1% of Trust turnover.
It will report its approvals to the Trust Board, including an account of the cumulative
value of schemes approved in-year.
It will also consider all business cases classed as major or high risk and make
recommendations for approval or rejection to the Board.
6.3 TRUST EXECUTIVE GROUP
The Trust Executive Group will have delegated authority to approve investments
below the level of 0.25% of turnover, which do not qualify as high risk investments.
It will report its approvals to the Finance Committee, including an account of the
cumulative value of schemes approved in-year.
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It will also consider schemes which have costs between 0.25% and 1.0% of Trust
turnover and which do not qualify as high risk investments. It will make
recommendations about these proposals to the Finance Committee.
The Trust Executive Group may choose to delegate approval of capital investments
below a certain value to the Capital Prioritisation and Review Group.
6.4 CAPITAL PRIORITISATION AND REVIEW GROUP
The Capital Prioritisation and Review Group will report to the Trust Executive Group.
The Group will be responsible for co-ordinating the capital planning process and
issuing internal guidance, ensuring that the appropriate initiation and risk
assessment documentation is in place for proposed schemes. It will make
recommendations about proposals to the Trust Executive Group and the Finance
Committee in line with their respective decision rights. These recommendations will
cover both approval or projects and the programming of related expenditure.
The Group will approve capital investments which fall below a delegated limit defined
by the Trust Executive Group.
The Capital Prioritisation and Review Group will report performance against the
capital programme both to the Finance Committee and the Trust Executive Group.
6.5 SUMMARY
Table 2 summarises the business case requirements and decision rights for the
various categories of investment described in this policy.
Decision rights
Category
High risk
Project
initiation &
risk
assessment
Major
(> 1%
turnover)
% of turnover
Business case
requirements
>2%
0.25%-2%
<0.25%
>2%
OBC + FBC
Comprehensive
Short-form
OBC + FBC
1% – 2%
Comprehensive
0.25%-1%
Comprehensive
<0.25%
Short-form
Table 2. Investment categorisation and decision.
Other
Trust
Executive
Group
Finance
Committee
Board of
Directors
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7. EVALUATION
Business cases will be evaluated against explicit financial and non-financial criteria.
7.1 FINANCIAL CRITERIA
Proposals which are not classed as major will be assessed for scheme affordability.
Business cases for major capital investment (over 1% of turnover) will be expected
to demonstrate a sustainable positive return on assets as follows:
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3.5% if internally funded or financed through Public Dividend Capital
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at the opportunity cost to the Trust of interest, if financed through prudential
borrowing (currently assumed to be 5.0%).
The return from an individual capital project will be calculated as the return on all
assets invested in the project.
The Board of Directors may choose to waive the requirement to deliver the specified
rate of return on assets, where it deems that exceptional circumstances apply. Such
circumstances may include mitigation against serious strategic, statutory, regulatory,
operational or reputation risks.
In this case, the Board will make the final investment decision itself, including explicit
approval of the cross-subsidy arrangements which should apply to the investment in
question.
7.2 NON-FINANCIAL CRITERIA
The following non-financial criteria will be used to evaluate all capital investment
proposals.
Strategic Fit – the extent to which the proposed investment is consistent with the
corporate strategic objectives highlighted in the investment philosophy above (or
other agreed corporate strategic objectives) and will contribute to delivery of those
objectives.
Patient care - the extent to which the proposed investment will improve the quality of
patient care in the Trust and/or the patient experience of Trust services.
Market share - the extent to which the proposed investment will support the
maintenance or expansion of the Trust’s market share and income base.
Risk Mitigation - the extent to which the proposed investment addresses existing or
anticipated strategic, financial, operational, regulatory, political or reputation risks.
Weightings will be applied to the scoring of investments against these criteria. The
weightings will be formally agreed by the Board of Directors as part of the annual
review of the Investment Policy. The current applicable weightings shown in Table 2.
Criterion
Strategic fit
Patient care
Market share
Risk mitigation
Weighting
25%
25%
20%
30%
Table 2.
A scoring template for non-financial appraisal of an investment is attached at Annex
2.
8. RISK MANAGEMENT
The non-financial evaluation criteria include risk mitigation. They therefore take into
account the risk of not entering into a proposed investment.
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The Trust will also take into account the risk and return (both financial and nonfinancial) of making a proposed capital investment. The risks will be fully identified
and assessed according to the Trust’s standard risk assessment tool. A sample due
diligence checklist from Monitor is attached at Annex 3.
The Trust will seek to quantify the risks of a proposed investment in financial terms
wherever possible. Business cases for major investment will include a quantified risk
assessment and full sensitivity analysis.
The Trust will actively monitor the performance of its investments and ensure that
adequate risk mitigation is in place.
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ANNEX 1
THRESHOLDS FOR REPORTING INVESTMENTS TO MONITOR
Source: Compliance Framework, Monitor, May 2008
MAJOR INVESTMENTS:
MATERIAL AND SIGNIFICANT TRANSACTIONS:
ANNEX 2
SCORING MATRIX FOR NON-FINANCIAL EVALUATION OF AN INVESTMENT
SCORE
STRATEGY FIT
PATIENT CARE
MARKET SHARE
RISK MITIGATION
5
Clear evidence that the case delivers
a specific & tangible element of the
Trust’s Strategy
Clear evidence that the case delivers
a specific & tangible improvement to
patient care
Growth in Market share is real,
sustainable, increases income
& is agreed with the Trust’s key
stakeholders
Very high risk score (> 20) as per
Trust’s Risk Assessment Matrix
4
Clear evidence that the case directly
drives a specific & tangible element
of the Trust’s Strategy
Clear evidence that the case directly
drives a specific & tangible
improvement in patient care
Case identifies real potential for
future sustainable increases in
income & Market share
High risk score (15 to 19) as per
Trust’s Risk Assessment Matrix
Clear evidence that the case directly
drives the delivery of the Trust’s
Strategy & Mission
Evidence that the case influences a
specific part of supports the wider
delivery of the Trust’s Strategy &
Mission
Clear evidence that the case directly
drives the Strategy on improving
patient care
Case directly influences other
opportunities for future growth in
income & Market share
Medium risk score (9 to 14) as
per Trust’s Risk Assessment
Matrix
Evidence that the case influences a
specific part of the Strategy on
improving patient care
Case is needed to maintain our
current market share & income
Moderate risk score (4 to 8) as
per Trust’s Risk Assessment
Matrix
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2
1
Evidence that the case influences the
delivery of the Trust’s Strategy &
Mission
Evidence that the case influences
improvements in patient care
No impact on market share &
income
Low risk score (1 to 3) as per
Trust’s Risk Assessment Matrix
0
No impact on delivering the Trust’s
Strategy & Mission
No impact on patient care
improvements
Reduces market share & income
No risk, score 0
x 25
x 25
x 20
x 30
Scores
Weighting
Weighted scores
Total score
ANNEX 3
SAMPLE DUE DILIGENCE CHECKLIST TO INFORM RISK
ASSESSMENT
Source: Risk Evaluation for Investment Decisions by NHS Foundation Trusts Monitor, February 2006.